Educational Articles

From The Survey: Ensco plc

Marek Mscichowski
| August 17, 2013

While investors may have heard about Ensco’s (ESV) bigger brother in the offshore services industry, Transocean (RIG) (especially after the recent proxy fight with Carl Icahn and the headline-making Deepwater Horizon incident), Ensco, with the second largest number of offshore rigs in the world, has seen less of the limelight. Though perhaps less tabloid worthy, at least its stock has been a bit more buoyant.

The company, once called Blocker Energy Corp., started trading as the Energy Services Company in 1987, after an investment led by Texas billionaire Richard Rainwater. It changed its name to Ensco in 1995 and listed on the New York Stock Exchange.

In 2000, it acquired its first ultradeepwater semisubmersible drilling rig, marking the beginning of what would be one of the most important ultradeepwater fleets in the world.

In 2009, the same year its first ultradeepwater rigs entered service, it changed its domicile from Delaware to the U.K., starting a trend among its peers to move across the pond for tax reasons. Since then, Rowan Companies (RDC) (a smaller peer) and Noble Corp. (NE) (Ensco’s closest competitor) have done the same. Both companies cited the U.K.’s international orientation and favorable tax regime as reasons. Transocean, meanwhile, remains domiciled in Switzerland.

The next year, the company raised its dividend from $0.025 to $0.35, making for a more competitive return, and one that would incrementally increase since.

In 2011, it acquired rival Pride International for about $7 billion, increasing the number of shares outstanding by about 60% and adding roughly $4.5 billion worth of debt to its balance sheet. The move helped bring more modern units into the fold, while also helping to broaden the company’s reach to lucrative places like Brazil and West Africa, both points of the so-called Golden Triangle (along with the Gulf of Mexico, where Ensco had operated since the previous year). Daniel. W. Rabun, CEO since 2006, said that the two companies “complement each other with minimal overlap.” It was this move that brought Ensco to the forefront of the offshore drilling industry.

More recently, the company has been returning capital to its shareholders. It further raised its quarterly dividend from $0.375 to $0.50 this year. The company also recently announced a $2 billion stock buyback authorization.

Throughout its history, Ensco has relied on horizontal integration of competitors, as well as capital investments in new drilling equipment to grow. Its stock price has traded in a wide band, and is sensitive to macro factors, yet, the issue still has been on a gradual uptrend and now trades around $60, compared to less than $10 in 1995.

How does Ensco stack up with its competitors? According to the company, it has 74 offshore rigs, trailed closely by Noble Corp.’s 73, and behind only Transocean’s 95. Further behind are Seadrill (SDRL) and Diamond Offshore Drilling (DO). In addition, Ensco touts its fleet as relatively new, compared to its peers.

The top five offshore drillers don’t even comprise 50% of the market, making for a competitive field. Furthermore, recent big capital investments are going to increase supply. One source estimates that there are 200 movable offshore rigs under construction to add to the 871 already in operation and that the fleet of deepwater rigs is expected to increase materially.

In terms of ultradeepwater drilling, Ensco is a world leader. And it just ordered its eighth ultradeepwater drillships (four are already on line). This compares to the 64 in operation industrywide and another 70 that are under construction. With all these investments, will the industry become oversupplied? The answer to this question is not clear. As a result, whether Ensco will continue to post strong returns on equity remains to be seen.

For now, Ensco stands at the forefront of an industry that is expecting a lot of growth, as evidenced by the equipment buildup mentioned above. Investors are advised to see our quarterly updates on this stock in our Value Line Investment Survey for up-to-date information on this company’s fortunes going forward.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.